Adidas’ growth slows down in Europe

The Adidas Group has seen a slowdown in its sales growth in Europe and in Originals in the first quarter of this year, but the company held on to its guidance due to robust expansion in North America and China as well as further margin improvements.

The group's sales were up by 1.9 percent to €5,548 million for the quarter, which was a rise of 10 percent in constant currencies. Its gross profit margin moved up by 1.5 percentage point to 51.1 percent, due to improved pricing and product mix, and in spite of unfavorable changes in exchange rates. While it continued to over-invest in marketing, the group saw its operating margin move up by 1.8 percentage points to 13.4 percent, and it ended with net income from continuing operations up by 17 percent to €542 million.

The Adidas Group's sales advanced by 4.4 percent to €1,603 million in Western Europe, which covers nearly all of Europe. In a departure from the underlying double-digit increases of the last years, the sales increase amounted to a rise of 4.8 percent in constant currencies. The Adidas brand alone managed an increase of 5 percent in constant currencies for the three months, driven by football and Originals. Reebok's regional sales firmed up by just 1 percent but this comes after a 25 percent jump in the year-ago period. The company said that its sales declined in France, but they were up in all other large European markets, with strong increases in southern Europe and Germany.

Kasper Rorsted, the group's chief executive, told journalists yesterday that its European turnover was pushed up by sales related to the football World Cup ahead in Russia, where Adidas will outfit 12 teams. He predicted that European sales will be flattish in the second quarter, as this positive impact of a couple of percentage points from the event will not occur to the same extent as in the first quarter.

The slower growth in Europe contrasted with the group's performance in North America and China, two other markets where it has been moving ahead at a double-digit clip. This continued with a sales jump of another 21 percent in constant currencies in North America, including a rise of 23 percent for the Adidas brand. With a sales hike of 26 percent, China was the key market behind a sales rise of 15 percent in the Asia-Pacific region, including an uptick of 17 percent for Adidas alone. Latin America delivered an underlying sales increase of 10 percent, driven by Argentina, Mexico and Brazil.

The group's sales continued to shrink in Russia and the former CIS countries, down by 16 percent in constant currencies and by 25 percent in reported terms to €119 million. It shuttered another 93 stores in the three months to end up with about 600 outlets for the Adidas and Reebok brands. The downturn was blamed on the economic circumstances, which are putting pressure on prices, and the company apparently sees little room for improvement unless the political situation changes, in relation with the sanctions imposed on Russia. The group wants to stick with its approach of selling only through its own retail operations and online in Russia. Adidas is preparing to launch its shopping app in the country later in the second quarter. But the scope of the retail business has been adjusted to the size of the group's Russian turnover, which now makes up less than 3 percent of the group's sales.

It turned out in this context that Rupert Campbell returned to the Adidas Group to become managing director in Russia in March, reporting to Roland Auschel. He had already been with the group for more than three years, most recently as senior vice president in charge of retailing in Western Europe, but he left in 2015 to become chief executive of the Lucozade Powerleague for five-a-side football.

Other emerging markets were another regional weak spot for the group, with an underlying sales decline of 5 percent. The group pointed to oil prices affecting sales in parts of the Middle East, along with reduced tourism flows. Turkey and South Africa were among the markets affected by the downturn.

Rorsted said that the company was comfortable with its current growth profile, which is more balanced across its sports and fashion products. The Adidas brand raised its sales by 3.3 percent to almost exactly €5.0 billion for the quarter, up by 11.4 percent in constant currencies. On this basis, sports performance products saw a sales increase of 11 percent driven by double-digit increases in football, training and running. This compares with an increase of 13 percent for sport-inspired products, with double-digit increases in both apparel and footwear. The women's business under the Adidas brand generated a double-digit sales increase, to make up about 25 percent of its turnover.

The company said that Originals faced tough comparisons with the year-ago quarter and it continues to invest to build up modern franchises, to make up for the more stable demand for franchises such as Superstar and Stan Smith. The slower growth of Originals was one of the factors behind the relative under-performance of the footwear category, for which the Adidas brand reported mid-single-digit growth. Adidas saw a faster uptick in its apparel business, driven by strong double-digit growth for the Athletics range.

The Reebok brand managed a return to growth in North America, where its sales moved up by 3 percent in constant currencies, and the company is anticipating further improvement as the year progresses. Then again, Reebok's sales were under pressure in Japan and South Korea, which led to an underlying sales decline of 9 percent in Asia-Pacific, despite increased sales in China. Along with sales declines in Russia and Latin America, this regional weakness dragged the brand's sales down by 10.6 percent to €440 million for the quarter, off by 3.0 percent in constant currencies.

However, Reebok continued to benefit from restructuring measures taken as part of the Muscle Up program. Its gross profit margin was up by 2.7 percentage points to 41.8 percent for the quarter. This compares with a gross margin of 47.8 percent for the Adidas brand, up by 0.6 percentage points.

The group's sales growth for the quarter was supported by a rise of 27 percent in constant currencies for online sales. The group's comparable store sales were down for the quarter, which was mostly blamed on Russia. Online sales could be bolstered by the launch of the Adidas brand's shopping app in the U.S., the U.K. and Germany, which led to more than 1.5 million downloads so far.

The group has appointed a senior vice president of digital, Scott Zalaznik, who started in May, to accelerate its digital transformation. Zalaznik previously led significant, record-breaking growth and conversion for global online sales at Michael Kors, the Adidas group said. He will report to Eric Liedtke.

Adidas upheld its guidance that sales will move up by 10 percent in constant currencies for the year, with double-digit growth in North America and Asia-Pacific. Its gross margin is predicted to increase by up to 0.3 percentage points to reach up to 50.7 percent, and the operating margin is set to improve by between 0.5 and 0.7 percentage points, to end up between 10.3 percent and 10.5 percent. The group's net income from continuing operations should reach between €1,615 million and €1,675 million.

Unlike Puma, the Adidas group appeared unconcerned about potential tariffs imposed on U.S. imports of Chinese footwear. Rorsted said that it sourced most of its footwear from Vietnam and Indonesia, apart from products intended for the Chinese market.